The current ratio is calculated as what?

• A. Current liabilities divided by current assets
• B. Total assets divided by total liabilities
• C. Net income divided by total equity
• D. Current assets divided by current liabilities

Answer: (D)

The current ratio shows how well a company can cover its short-term obligations with its short‑term resources. It’s calculated by dividing current assets by current liabilities, so the best choice uses current assets in the numerator and current liabilities in the denominator. This focuses on assets expected to be converted to cash or used up within a year versus obligations due within the same period, giving a quick view of short-term liquidity.

If you flip the components, you’d be looking at how much of liabilities you have per unit of assets, which isn’t the standard liquidity measure. Other options involve total assets vs. total liabilities (a leverage measure) or net income vs. total equity (a profitability ratio), which aren’t about short-term ability to pay.

Example: If current assets are 50,000 and current liabilities are 25,000, the current ratio is 2.0, indicating a healthy short-term cushion.